LessonEight:

StatementofCashFlowsAims:1.ExplaintheconceptofTheCashFlowStatements.2.Classifyactivitiesaffectingcashasoperating,investing,orfinancingactivities.3.Usethedirectmethodtomeasurecashflows.4.Determinecashflowsfromincomestatementandbalancesheetaccounts.5.Usetheindirectmethodtocalculatecashflowsfromoperations.8.1

IntroductiontoStatementofCashFlowsAstatementofcashflowsreportsthecashreceiptsandcashpaymentsofanentityduringaperiod.Itexplainsthecausesforthechangesincashbyprovidinginformationaboutoperating,financingandinvestingactivities.8.2

ClassificationofaFirmsActivitiesAffectingCash(1)operatingmanagementisprimarilyconcernedwithmajorday-to-dayactivitiesthatgeneraterevenuesandexpenses(operatingactivities);and(2)financialmanagementislargelyconcernedwithwheretogetcash(financingactivities)andhowtousecash(investingactivities).8.3

TwoMethodsofComputingCashFlows

fromOperatingActivitiesTwoapproachescanbeusedtocomputethenumberreportedascashflowfromoperatingactivities.(1)Computingitascollectionslessoperatingdisbursementsiscalledthedirectmethod;(2)Adjustingtheaccrualnetincometoreflectonlycashoutlaysiscalledindirectmethod.8.4

TransactionsAffecting

CashFlowsfromAllSourcesTYPE

OF

TRANSACTIONCASHOperating

ActivitiesSales

of

goods

and

services

for

cash+Sales

of

goods

and

services

on

credit0Receive

dividends

or

interest+Collection

of

accounts

receivable+Recognize

cost

of

goods

sold0Purchase

inventory

for

cash-Purchase

inventory

on

credit0Pay

trade

accounts

payable-Accrue

operating

expenses0Pay

operating

expenses-Accrue

taxes0Pay

taxes-Accrue

interest0Pay

interest-Prepay

expenses

for

cash-Write

off

prepaid

expenses0Charge

depreciation

or

amortization0Investing

ActivitiesPurchase

fixed

asset

for

cash-Purchase

fixed

assets

by

issuing

debt0Sell

fixed

assets+Purchase

securities

that

are

not

cash

equivalents-Sell

securities

that

are

not

cash

equivalents+Make

a

loan-Financing

ActivitiesIncrease

long-term

or

short-term

debt+Reduce

long-term

or

short-term

debt-Sell

common

or

preferred

stock+Repurchase

and

retire

common

or

preferred

stock-Purchase

treasury

stock-Pay

dividends-Convert

debt

to

common

stock0Reclassify

long-term

debt

to

short-term

debt08.5

PreparingaStatementof

CashFlowsUsingtheDirectMethodCashflowsfromoperatingactivities:(1)Collectionsfromsalestocustomersarealmostalwaysthemajoroperatingactivity.(2)Disbursementsforpurchasesofgoodstobesoldandoperatingexpensesarealmostalwaysthemajoroperatingcashoutflows.(3)Theexcessofcollectionoverdisbursementsisnetcashprovidedbyoperatingactivities.8.6

PreparingaStatementof

CashFlowsUsingtheIndirectMethodTheindirectmethodofcomputingcashflowsfromoperatingactivitiesreconcilesnetincometothenetcashprovidedbyoperatingactivities.(1)Depreciationisaddedbacktonetincomebecauseitisanon-cashitem.(2)Adddecreasesinnon-cashcurrentassets.(3)Addincreasesincurrentliabilities.(4)Deductincreasesinnon-cashcurrentassets.(5)Deductdecreasesincurrentliabilities.8.9

ComputingCashFlows

fromOperatingActivitiesOperatingcashinflowsminusoperatingcashoutflowsequalsthenetcashprovidedby(orusedby)operatingactivities.Collectionsfromsalestocustomersareusuallythelargestsourceofoperatingcashinflows.

Disbursementsforpurchasesofgoodstobesoldandoperatingexpensesareusuallythelargestsourcesofoperatingcashoutflows.8.10

ComputingtheCash

CollectionsfromCustomersSales

$400

000

Beginning

accounts

receivable50

000

Potential

collections

$450

000

Ending

accounts

receivable

(90

000)

Cash

collections

from

customers

$360

000

Sales$400

000Decrease(increase)in

accounts

receivable

(40

000)

Cash

collections

from

customers

$360

000

8.11

ComputingtheCash

PaymentstoSuppliersThedifferencebetweencostofgoodssoldandcashpaymentstosupplierscanbedeterminedbylookingatinventoryandaccountspayable.Ending

inventory$200

000

Cost

of

goods

sold200

000Inventory

to

account

for$400

000

Beginning

inventory

(120

000)

Purchases

of

inventory

$280

000

Beginning

accounts

payable$12

000Purchases

of

inventory280

000

Total

amount

to

be

paid

in

cash$292

000Ending

accounts

payable

(148

000)

Accounts

paid

in

cash

$144

000

Theeffectsofinventoryandaccountspayableonthepreviousslidecanbecombinedintoonecalculationasfollows:Cost

of

goods

sold$200

000Increase(decrease)in

inventory80

000Decrease(increase)in

accounts

payable

(136

000)

Payments

to

suppliers

$144

000

8.12

ComputingtheCash

PaymentstoEmployees

Beginning

wages

and

salaries

payable$8

000Wages

and

salaries

expense72

000

Total

to

be

paid

in